Other Central Banks Impacting US Money Supply

by Lee Adler, Wall Street Examiner

This is a syndicated repost courtesy of Sober Look. To view original, click here.

Sober Look had an interesting post yesterday pointing out the problems the Fed has been facing lately in achieving money supply growth. I’ve covered this issue at length here so I sent Sober Look a quick note summarizing what I’ve observed. He was gracious enough to immediately share these thoughts, which follow, with his readers.

When the Fed prints reserves by buying MBS and Treasuries with money that did not exist previously, this increases bank deposits (liabilities) and cash assets pretty much dollar for dollar. I have run charts showing this relationship, but something went wrong beginning in January.

SOMA vs Bank DepositsClick to enlarge

US Commercial Bank Loans and DepositsClick to enlarge

That something was the breakdown in Treasuries holdings, as Eurozone banks began to unwind the LTRO trade at the first opportunity in January.

ECB and US Treasury Market Click to enlarge

The Fed is not the only actor in this game. All the major central banks conduct operations with the Fed’s 21 Primary Dealers. US money supply data represents not just the US but is a pretty big slice of the whole world and reflects other central bank policies and the flows of capital between nations and banking systems.

Treasuries were liquidated to pay down the LTRO. At the same time we saw the echo of that in US commercial bank repo lending and other securities lending to nonbanks, extinguishing the offsetting deposits.

Bank Repo and Securities Loans to Non-banksClick to enlarge

The forced march liquidation of leveraged holdings by big Chinese shadow institutions also showed up here. The BoE has also been running tighter policy (see US and Japan Pump It, Chinese Dam It and Suck, And Europe Sullenly Suffers Shrinkage).

So the Fed and BoJ are fighting an uphill battle to keep money supply inflating. US money supply would still be increasing dollar for dollar with the Fed’s purchases, but some of  their friends, other central banks, are no longer cooperating.

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